The court's power to appoint provisional liquidators to carry out rescue roles: Rethinking Legend

• DOI: http://doi.org/10.1002/iir.1330
• Published date: 01 March 2019
• Date: 01 March 2019
• Author: Charles Zhen Qu

RESEARCH ARTICLE

The court's power to appoint provisional

liquidators to carry out rescue roles: Rethinking

Legend

Charles Zhen Qu

School of Law, City University of Hong

Kong, Kowloon, Hong Kong

Correspondence

Charles Zhen Qu, Associate Professor,

School of Law, City University of Hong

Kong, Kowloon, Hong Kong.

Email: czqu00@cityu.edu.hk

Funding information

Research Council of the Hong Kong Spe-

cial Administrative Region, China, Grant/

Award Number: CityU11606215

Abstract

Adictum in a 2006 Hong Kong Court of Appeal deci-

sion had since halted the use of provisional liquidation

as a restructuring device in Hong Kong, where no pur-

pose‐built moratorium is provided, until recently,

where the Court of First Instance reaffirmed the role

of provisional liquidation in restructuring. The Court

of First Instance (CFI) judges did so without appearing

to contradict the Court of Appeal (CA) position by

reconstructing the CA dictum. This paper argues that

the CA dictum does not make sense in the first place

and pointing out why this is so is more helpful in clar-

ifying the governing rule than a reconstruction of CA's

words, which may mislead.

1|INTRODUCTION

In a series of recent decisions, the Court of First Instance of Hong Kong's High Court rejected the

Court of Appeal's view on the role of provisional liquidation in corporate restructuring without

being seen to have done so. The CFI did so through a reconstruction of Rogers V‐P's dicta in a

2006 decision, which represents the CA's stance on this issue. In Re Legend International Resorts

Ltd (Legend [CA]),

1

Rogers V‐P observed, obiter dictum, that the “primary purpose of appointing

provisional liquidators must always be the purposes of the winding up,”rather than restructuring

a company.

2

A provisional liquidator is an insolvency professional appointed by the court after a

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© 2019 INSOL International and John Wiley & Sons, Ltd

1

(2006) 2 HKLRD 192 (CA), [36].

2

Idem:“Restructuring a company is an alternative to a winding‐up.”

Received: 5 December 2018 Revised: 5 January 2019 Accepted: 5 February 2019

DOI: 10.1002/iir.1330

86 Int Insolv Rev. 2019;28:86–102.wileyonlinelibrary.com/journal/iir

winding up petition is made against the company pending the outcome of the application.

3

Rogers V‐P's dicta, as will be seen, have created uncertainties, which have been adversely conse-

quential, on the legitimacy of using provisional liquidation as a restructuring tool in Hong Kong.

4

The CFI's reconstruction of Roger's V‐P's words is useful in neutralising the effect of his Lord-

ship's dicta. It, however, arguably contributes to the creation of a misleading impression that

Rogers V‐P's dicta constitutes no barrier to the use of provisional liquidation as a restructuring

tool. The CFI's decisions mentioned above are therefore unlikely to be of assistance in clearing

the uncertainties resulting from CA's decision in Legend.

Certainty on the abovementioned issue is crucial for promoting restructuring in Hong Kong

because, inter alia, an appointment of provisional liquidators triggers an automatic moratorium

on creditors' enforcement actions or proceedings.

5

This feature of provisional liquidation helps

address a major inadequacy of the Hong Kong version of the schemes of arrangement regime,

namely, that it does not contain a moratorium provision. The scheme of arrangement is the only

statutory cramdown device

6

available in Hong Kong for the purposes of, inter alia, restructuring

a company's debt. Certainty on the issue raised may also be important where it is necessary for a

company incorporated in Hong Kong to petition for the appointment of provisional liquidators

to help implement the effort of the group, in which the company is a member, to restructure the

group's debts in an overseas jurisdiction where automatic moratorium is provided for, such as

Singapore.

7

Aiming to remove the uncertainties mentioned above, this article undertakes a re‐examina-

tion of Rogers V‐P's dicta in Legend. It does this through an analysis of, in addition to his Lord-

ship's dicta, the effect of section 192 of the Companies Ordinance (HK, Cap 32), which Rogers

V‐P relied on in forming his view on the issue raised, as well as the ways in which his Lordship's

dicta were interpreted in the recent series of CFI cases mentioned above. The analysis will show

the following:

a) The central point of Rogers V‐P's dicta was indeed that the power to appoint provisional liq-

uidators may only be exercised for the purpose of a winding up;

b) His Lordship's view on this issue is based on a misinterpretation of section 192; and

c) Legend constitutes no obstacle to using provisional liquidation as a restructuring device, not

because Rogers V‐P did not interpret section 192 the way he did but because that provision

does not say what his Lordship believes it says.

The remainder of the article is structured as follows. Section 2 considers the traditional roles of

provisional liquidators and the development of provisional liquidation as a restructuring device.

3

For more discussion on the roles of provisional liquidators, see Section 2.

4

See below (n 55) and associated text.

5

Cap 32, section 186.

6

“Cramdown”means the ability of the majority to bind the minority: see Jennifer Payne, “Debt Restructuring in English

Law: Lessons from the United States and the Need for Reform”(2014) Law Quarterly Review 282, 284, 291.

7

Companies Act (Singapore), section 211B; Re CW Advanced Technologies Ltd [2018] 2 HKLRD 552 (although the Sin-

gapore restructuring plan there did not proceed due to, inter alia, that the it did not have the support of a major cred-

itor); Meng Seng Wee, “The Singapore Story of Injecting US Chapter 11 into the Commonwealth Scheme”(2018) 15(3)

European Company and Financial Law Review 553–584; Gerard McCormack and Wai Yee Wan, “Transplanting Chapter

11 of the US Bankruptcy Code into Singapore's Restructuring and Insolvency Law: Opportunities and Challenges”(2018)

Journal of Corporate Law Studies, available at

14735970.2018.1491680>.

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